Erosion of Receivables a growing problem for Asset Based Lenders

We are seeing more blue chip companies provide a menu of supply chain finance for suppliers, including reverse factoring, dynamic discounting, and pcard programs to help a portion of their total spend. Many suppliers sign up. Good for the buyer and good for his suppliers. But not so good for the Asset based Lender.

From a lenders perspective, a typical portfolio of Asset Based Loans (ABL) is weighted 65% receivables and 35% inventory. Because some of that AR financing is going to go away (or will over the next few years) with access to early pay programs, suddenly instead of having $50M in receivables a client will have $25M to develop lending programs.

That is bad for an ABL. It makes it harder to compete for a leveraged loan. There is generally a cross over point where companies can borrow more against their assets than they can their cash flows. Now with less receivables, same EBITDA, a lender will have less assets to lend against.

Now two questions that cannot be answered by anyone (although we at Spend Matters and Trade Financing Matters have some directional feel) is how quickly early pay models and marketplace models will erode the receivable base and by how much.

So how do commercial finance companies play in this space?

Option 1, which is what the vast majority are doing, is do nothing and watch my receivable base erode. Essentially what they are saying is it is not a problem today and I don’t believe it will be tomorrow.

Option 2 is we are building our own Purchase to Pay software solution in our Treasury, Payments, or pcard groups and they will figure it out. Uh huh. Right, corporates love using bank software. I don’t think so. The supplier networks, business information networks, eInvoicing and eProcurement vendors are deeply integrated, with great tools, user interfaces, onboarding, etc. They have to, their revenue depends on it.

Option 3 is actually figure this out. While there are many options to consider, none are going to be easy or straightforward. For example, a bank could:

Provide balance sheet as an investor

Leverage a platform (ie, license) to develop new product solutions

Work with vendors to develop APIs to use network data to underwrite

Obtain exclusive rights to fund certain assets

Provide funding above and beyond risk parameters set by Networks and their partners

But doing Option 1 or 2 is not going to cut it unless you strictly focus on purchase order or inventory finance. And even there, I would imagine solutions are coming which will use business networked information to enhance underwriting. Download our recent whitepaper on On Demand Networks

David Gustin is currently doing some syndicated research on this topic. To learn more, contact him at dgustin (at) tradefinancingmatters.com